Study: Covid19 Impact on the Israeli Early-Stage Ecosystem

The world has changed. While we yearn to return to “normal”, the impact of COVID-19 on our lives will create long-lasting change. As far as technology adoption, it will hopefully be for the better. Digital health, vaccine discovery and manufacturing, work-from-home, digital educational tools and e-commerce have all made significant leaps towards mainstream adoption in 2020.

The stock market continues to rise and the headlines in the tech industry are filled with IPOs, SPACs and massive investment rounds. Away from the headlines, we felt that the start-up ecosystem seemed ok, maybe even good, but not crazy good or depressingly bad, like the media has made it sound. We decided to take a closer look at the data which might otherwise be obscured by these dazzling headlines.

We started by collecting data from PitchBook and CrunchBase on over 600 companies that had announced fundraising events in 2020. We analyzed the data and scraped it to 150 companies which fit the criteria matching the stage, industries and geographies where we are active investors. This enabled a comparison to what we were seeing out in the field. To compliment this, we conducted a survey to take a deeper dive with a representative subset of over 30 companies which matched these criteria.

At the highest level, PitchBook reported that in 2020, “investors deployed $156.2B into start-ups, liquidated $290.1B of value via exits, and closed on $73.6B [of new capital] in traditional VC funds.“[1] Clearly a frothy market. But where are all those investment dollars being deployed?

Pitchbook continues: “…the investment cycle, seed-stage and first-time financing activity fell sharply, proving a more challenging fundraising environment for newer entrepreneurs.”1 CrunchBase supported this conclusion reporting that, globally, seed funding in the 4th quarter of 2020 was down 27% year over year, and early stage funding was down 11% year over year”[2] – despite the sense that the market was coming back with the end of the pandemic in sight due to the vaccinations.

Our survey data showed differently. From the responses we collected, the majority of the companies in our survey who successfully raised capital in 2020[3] were early-stage start-ups (pre-seed, seed, seed+). Our survey further showed that 61% of the companies had planned to raise capital in 2020, of which 68% succeeded in doing so. Of those who raised capital successfully during 2020, about 53% raised up to 3 million USD, another 20% raised up to 10 million USD, with the remaining raising either above 10 million USD or preferred not to say.

Furthermore, there does not seem to be a high correlation between companies who were able to raise capital in 2020 and the existence of a prior relationship with the investors, or whether an in-person meeting with the investors occurred.

One possible explanation for this difference between the data sets is that seed rounds are not reported when they occur but rather at a later date, whereas the survey data was collected directly from start-up executives and founders, reporting anonymously.

 While pre-pandemic the Series A Crunch was a real concern for seed stage companies looking for their next round, from our analysis it seems that there was a clear reduction in early stage companies receiving seed, and even pre-seed, investments. The “crunch” seems to have expanded to the earlier stages, raising the bar for receiving funding. Investors were being even more risk averse with their venture capital. We also derived that later-stage companies (series B and beyond) were impacted in a very limited way by COVID-19, far less than was expected at the beginning of the pandemic[4], with late-stage and growth funding up year over year by 4% in 20204.

To address this new/expanded “crunch”, professional pre-seed and seed investors need to be able to move quickly, yet responsibly, to pursue promising opportunities.

The impact of the pandemic goes far beyond capital raising. Over 83% of the companies responding to our survey stated their business operations were affected by COVID-19. The areas that were affected most included sales, marketing, operations and R&D (in that order). Over 76% stated they adopted a work-from-home (WFH) policy with positive results. This corresponds with PitchBook’s findings[5] showing that more than 80% of US employers said enforcing WFH has been successful for their company, according to a late 2020 survey by PwC which included 133 executives and 1,200 office workers.

Many companies also had to reduce their employee headcount, prioritize new products or customize existing products while implementing cuts across administration costs, operations and even salary cutbacks. These responses support Ethosia’s year 2020 conclusion, presenting a 7% salary drop in the Israeli high-tech industry for the first time in the last decade[6]. On the bright side, PitchBook stated that almost 90% of private companies in the U.S. said they are hiring in the new year (2021)4.

A deeper analysis is required to understand who were the early-stage companies that secured funding and growth in 2020. The data lends itself to several hypotheses, including for example the power of top-tier (rockstar) teams and specific industries enjoying hyper-growth pursuant to the changes demanded on our lives due to the pandemic.

In conclusion we asked each founder how they felt about their company going into 2021. Despite COVID19 having a negative impact on most industries, it seems like the tech industry was harmed less: just over 80% of our respondents believe their company is positioned for hyper-growth in 2021, and most respondents declared their company’s valuation has increased over 2020, painting a picture of an optimistic future. We would expect nothing less from a start-up founder pursuing their dreams.

We hope that you – founders and investors – find this study useful as you look to navigate the early-stage Israeli start-up ecosystem in 2021. Please feel free to reach out with any questions or to share your own experiences and insights.

**This study was conducted with Dana Rosenfarb from MIT. Thank you Dana!


[1] “Venture Monitor, Q4 2020”, Pitchbook, NVCA

[2] “Global VC Report 2020: Funding and Exits Blow Past 2019 Despite Pandemic Headwinds”, Gené Teare, CrunchBase

[3] 77% of the respondents were early-stage startups: pre-seed, seed, seed+ and Series A.

[4] https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753

[5] “Job market outlook for 2021: More hiring and more remote workers”, Priyamvada Mathur

[6]“2020 Year Summary”, Ethosia, https://www.ethosia.co.il/content/לראשונה-מזה-עשור-ירידה-של-7-בשכר-הממוצע-בהייטק-בשנת-2020-0

Deep Tech vs Now Tech

I find myself struggling with the question of whether Deep Tech must always be a long-term prospect, by definition.

Sure, creating meaningful innovation takes time. Deep Tech means that a lot of research and development is going into this new product or service. And as an early-stage investor this would lend itself to a long-term investment strategy.

Accordingly, most of the companies that we invest in require significant R&D before they can go to market. We focus on these companies because that is where we can roll up our sleeves and lend a hand. We find ourselves mentoring them as they navigate early customer engagements to bring the voice of the customer into the R&D process. This helps create truly game-changing innovation and strong product-market fit. And the next round of funding to continue their growth.

But then I meet a deep-tech-driven company that believes they are market ready. They are usually wrong. If so, then we can still add a lot of value and they are just placed later on the spectrum of early-stage, a little closer to a Series A than to a Seed round. Still well within our wheelhouse. However, if they are right, should we even be considering them as an investment opportunity?

From a portfolio construction perspective it makes a lot of sense to have some “later stage” companies which may generate earlier returns. It also balances the levels of engagement required from our team amongst the portfolio companies, as far as the time we spend with each.

Despite these considerations, I find myself second-guessing myself. Am I too just being anxious instead of practicing the patience I preach to my LPs? Or can Deep-Tech be engaged with the market and still be considered Early-Stage?

I welcome your thoughts.

Balancing Conventional Wisdom

There is a lot of conventional wisdom out there. Most people are happy to share even when not asked to do so..

And often it sounds really smart. I am referring to the kind of things that just make sense when you hear them. For example:

Founder A is looking to raise money for their startup. They will ask fellow founders, friends, family, investors, read blog posts and listen to podcasts. She will hear statements like the following:

Take whatever you can raise. Raising $1M is the same work as raising $2M or $10M so raise more if you are already raising.

Diligence your potential investors. Be sure they add value beyond capital and that they will be there for you during the hard times and not just the good times.

Raise only what you feel is completely necessary. Grow through hustle and hard work to create value that will be recognized in the next round’s valuation terms.

These three statements all make sense but could actually be contradicting each other. The best board member may not have the deepest pockets. The more capital you raise, the faster you can grow, right? Or are hustle and grit more important?

Let’s take this one step further.

Investor B is considering an investment. In “VC school” they were taught the following:

Never miss investing in a great company because of valuation.”

Be sure to make the numbers work because it is all about returns to your LPs through your ownership percentage.

Both are really important points. Which often contradict each other. This exacerbates the challenge faced by our Founder A above as she tries to develop her fund raising strategy and navigate the process, balancing the feedback she receives from each pitch.

Creating a balance and clear path from all of this good advice, is not simple. It is the “art” part of venture capital. Different funds have offered alternative approaches to solving this.

The large firms – A16Z or First Round Capital – have done a great job of creating value beyond their capital and an ability to support companies long-term. They are truly great investors and not just a brand name. But these types of offerings are limited to large funds who generously invest portions of their management fees (the larger the fund the more fess there are to go around) towards creating these support systems for their portfolio companies.

Smaller funds need to be more creative. A lot of the value is added through the active involvement of the investing partners themselves, with limited support staff if any. This makes the balance a lot trickier. I really like the approach created by Founder Collective (and now copied by many other small funds including SapirVP) by which they focus on getting all their capital in early and then position themselves to be diluted alongside the founders. This creates an alignment that I have found valued by most founders. In return the founders are willing to give up a little more equity in the early round so as to have such an investor onboard and in their corner for the subsequent rounds. 

Both approaches focus on value-add investing. These were the best type if investor I’ve worked with and from whom I learned much. Now it is our turn to provide this for the next generation of great founders.

I think it is important for Founder A to remember that when an investor says that they are “founder friendly” that does not necessarily mean that they are exactly on the same page. There are different interests at play. Maintaining this balance is not simple and can often derail an investment process. As I am constantly reminded. But when the balance is established great achievements can be realized together.

For further reading on this topic I suggest Jeff Bussgang’s Mastering the VC Game.

Q&A: Fundraising and COVID-19

When the pandemic first started making an impact on our lives back in March, I was scheduled to meet with a team of MBA students out of Tel Aviv University. These students were working on a project with a real company, helping them map the milestones and strategy required to be an attractive investment opportunity for venture capital. At the time, things were already in flux and there was no clear path forward. Elana Benedikt created a good summary of our interview and I had intended to post it here…

Last week I participated in an open Q&A session for the MassChallenge Israel 2020 cohort to discuss seed stage investing. While some of the questions were the standard fare – what is the difference between Seed and Series A? What is a pre-Seed? when should we approach angels vs micro-funds vs venture funds? etc. – there were definitely several questions directed at the world post-COVID19 and the impact on venture capital at the Seed stage.

I went back to the summary Elana had created and found that it was mostly still very relevant and reflected the conversation from the MC panel last week. So I am (finally) sharing it here. Thank you to Elana for the summary. Thank you to MC and my fellow panelists for the great session.

At the time this blog post is being written the world economy is struggling with the current repercussions and difficulty of future predictions during the COVID-19 pandemic. Large corporations, small businesses, and investors are dealing with new dilemmas. In light of that, we wanted to lay out the key aspects of the Israeli venture capital (VC) environment, with its collaborative nature and emphasize important markers for early success, as a service to early stage ventures. We had the opportunity to learn more about Sapir Venture Partners value set and its approach to finding startups and entrepreneurs that show the most potential to impact the world. We set out to hear about how the COVID-19 pandemic is affecting the investment sector and to gain insight into securing future investment. – Elana Benedikt, April 28, 2020

What Can You Tell Us that Makes the Israeli Early-Stage VC Environment Unique?

In the Israeli ecosystem, early stage VCs are very collaborative. Prior to COVID-19, VCs and entrepreneurs would attend many conferences a year in person, exchanging contact information with each other, and establishing relationships. These events are how most early stage VCs hear about new startups in the market and how entrepreneurs meet investors.

Having a warm introduction from a trusted source or connecting at an industry event, is much more impactful and valuable than sending a cold email. Establishing a relationship with a VC prior to sending a proposal is important for an investor to gain insight into the entrepreneurial team and company.

Successful entrepreneurs develop relationships with many different investors and maintain understanding of the specific type of investment that each VC specializes in. Entrepreneurs need to conduct extensive due diligence to truly understand the business model of each VC and the optimal way of approaching them. Each startup business development team member should be networking, actively seeking these investors, and developing meaningful relationships. Once these relationships are established, entrepreneurs need to be selective in maintaining deeper relations with the key investors in their specific industry and who invest at the relevant stage for their company. Additionally, entrepreneurs should understand the general rule which states that they will be “giving up” approximately 20-35% ownership per round in the early stages.

What is Your Viewpoint of the Early Stage VC Market?

An important fact to keep in mind is the number of opportunities VCs receive per year. For larger VCs it is approximately 1,000/year. Most funds invest in only 5-10 startups a year, and most will assume a 3-year deployment period. Each partner of the firm will personally be active in 5-6 startups at any given time.

Additionally, early stage investing involves significant collaboration between VC firms. This interaction multiplies the size of the network, amplifies ideas, and includes more people adding value. Most early stage rounds will have a single lead investor and other VC firms join as followers but can still contribute to the success of the company through a collaborative approach.

How has the Venture Capital Sector Been Impacted by the COVID 19 Pandemic?

Many investors would say that they are actively looking to invest, even though they may temporarily lack capital, or they prefer to preserve capital for their existing portfolio companies which may require more support. At the early stages we are seeing deals getting a 20% evaluation cut since March 1 2020, and that can be even higher for Series A or Series B companies. Most investors are focused on companies which they had already been engaged with prior to March 1st. Once these deals close, it is difficult to predict how future deals will be initiated and diligence will move forward with limited real-world contact.

What Should Entrepreneurs Do During the COVID 19 Pandemic?

Prior to the COVID-19 pandemic, investors and entrepreneurs could attend meetings and conferences in person. Today they should be attending as many online networking events as possible, so as to stay relevant and establish relationships with potential investors.

The first step to address during the crisis is to make sure you have enough capital to survive in the short term. Once this is accomplished, secondly focusing on R&D and further developing innovative technologies and solutions. Lastly, you should be prepared to take advantage of the upswing expected when the markets return.

Founders need to be strategic during this time and continue moving their companies forward wherever possible. Despite the challenges. If they can’t be out closing sales then they should focus on R&D and learn from their customers by doing market research to better design their solution. By pivoting away from focusing only on sales, these entrepreneurs can showcase their progress and path to profitability to investors once investing increases again.

A Few Final Quick Tips

If the team has received an offer for investment, there are a few important factors to consider, especially in a time of crisis. There are investors willing to take advantage of entrepreneurs during this difficult time, for example by requesting a larger proportion of equity than they would in a more stable market. Thus, it is imperative to have experienced professionals fully review the term sheet before accepting one from an investor. Another recommendation is to request to be put in contact with other founders in the investor’s portfolio. And reach out to them independently. By doing your due diligence, you’ll be able to identify the best potential fit with an investor and turn down offers that may be challenging partners in your efforts to realize your vision.

Remote Investing

As we begin to create a “new normal” for life with Covid-19 (coronavirus), there is a lot of discussion about how “work” is going to change.

During the peak of the outbreak, to comply with stay-at-home orders, many who could would work from home- did. This was especially relevant for tech companies who already used various collaboration tools to enable long-distance team work. In some cases this transition seemed almost natural. Some even argue that the pandemic has sped up market adoption rates by as much as 10 years for these tools, essentially changing the nature of work as we know it.

It would seem to me, that this can work well for pure software companies. However, for hardware being developed in the shop or biotech being developed in a lab, things are a little more complicated. Indeed, many parts of the innovation can be outsourced these days, but the core science needs to be done within the company. And, at the end of the day, someone, somewhere, needs to get in the lab to run the experiment and record the results. Most of us cannot do this at home.

Across our portfolio we have seen different approaches to the work-from-home situation. Anyone who could accommodate did, and most have shared only limited dips in productivity or even improvement. This seems to support the research about time wasted in traffic and the stress it creates, taking a toll on the productivity of our teams.

As someone who has been working out of the home office for almost 10 years, this was a non-issue for me. I knew how to hold video conference calls and had a comfortable working environment where I could be productive. I was more than happy to spend less time in traffic or at coffee shops for the two-days-a-week of meetings-in-person schedule which I was keeping. But I do miss visiting the portfolio companies. The insights from being on the ground are vital to providing good counsel to a CEO.

For us, the biggest challenge so far has been the inability to meet with founders of potentially new portfolio companies. It is much harder to assess the passion, conviction and nature of a founder when you only meet virtually. I remember this from my early days as an investor when I was reviewing companies with the team at TechU, where everything was done by video conference. I needed to “feel” the team to get comfortable. So when we set out to start our own fund, we made this a priority. At Sapir VP we are deeply engaged with the founders since we see ourselves as part of their team. We don’t dial-it-in, figuratively or literally.

As such, while we have been very active as investors during the pandemic closing a new investment each month, this may change in the near future. As we move forward with the opportunities we had engaged with before the pandemic locked us at home, and look to move forward with newer opportunities, even the ones we really like, we find harder to commit to. The concern is not about the tech, the market or the terms of a round. Rather it is truly about the people and whether we are a good fit to support them on their journey.

At the moment, we are trying to overcome this hurdle by spending more time with these founders, online. This has slowed down our process. It is frustrating to us just as it must be for the founders we are engaging with. I am sure we will miss out on working with some great teams because of this, but I prefer not to keep them hanging if we can’t get there at the moment.

Show me the “exit”?

Last month, I had what was technically our first “exit” as an investor.

One of our portfolio companies from our angel fund – A2Z Venture Partners – was acquired. This is definitely an exciting event. But the outcome as an investor is still unknown.

I am happy for the founder, who has become a good friend during this journey. And on paper our new holdings reflect a nice return. But it is all still on paper.

The above led me to question some of the data around “time to exit” of startup companies. We all know that companies are staying private longer. And that the tech titans of today created more value for their investors post-IPO rather than pre-IPO.

It used to be a rule of thumb that it was 6 years to success – either to get acquired (aka M&A) or long-term viability through profitability (aka IPO). Crunchbase shared data at the end of 2018 which indicated a very broad range of time-to-exit, depending on the industry, from 5 years and up to 16 years. In Israel, IVC shared data at the end of 2019 showing an average time-to-exit of 7.89 years for VC-backed Israeli companies.

When does this data stop the clock? Is it when the deal closes or when the investors see a capital return?

Based on what I’ve learned so far I would assume the former.